GBP/EUR – Advances despite Uncertain British Political and Economic Outlook
The historic decision that saw the UK vote to leave the European Union sent shock waves through financial markets, causing Sterling to drop to a 31-year low against the US Dollar and wiping trillions off global stock markets. The vote also caused a massive divide within political parties, with both Labour and the Tories seeing resignations. Prime Minister David Cameron resigned within hours of the result and Labour leader Jeremy Corbyn is facing an overwhelming vote of no confidence. Meanwhile, Cameron failed to trigger Article 50 which has added more uncertainty with regards to the UK’s economic outlook. However, Sterling enjoyed a two-day rally following the massive depreciation. This is partly due to consolidative trade, but also in response to global equity markets halting the Brexit selloff and positing gains.
GBP/USD – Edges Away from 31-Year Low
As was expected, the UK’s vote to Brexit caused traders to flock to safe-haven assets and the US Dollar advanced significantly. This has had a negative effect on the potential for a near-term Federal Reserve rate hike. As global stocks advanced, however, risk-on trade returned – inspiring marked US Dollar depreciation. Domestic data has had minimal impact with market sentiment driving currency movement. Markets are now pricing out a Federal Reserve rate hike until 2018 at the earliest.
USD/GBP – Will Domestic Data be More Impactful?
Now that the initial Brexit shock has subsided there is a good chance that domestic data publications will be more impactful. This is especially true for the US Dollar given its softer ties to the European Union. Conversely, the British Pound may not be affected by domestic ecostats for some time to come. This is not only because the political landscape is dominating trader focus, but also because many publications will be obsolete given that they refer to a pre-Brexit Britain.
EUR/USD – Climbs as Bond Prices Fall
There are many analysts that fear Brexit will have a much more negative impact on the Euro than any other currency. If Brexit becomes the catalyst for other EU member states to call for a referendum, the threat of contagion could see the end of the European Union and potentially the Euro itself. With so much uncertainty clouding the outlook and with the delay to the UK triggering Article 50, the Euro is likely to continue to struggle versus its peers irrespective of US Dollar weakness.